Accounting Topic 3

Accounting for Common Stock

Once issued - any subsequent purchases or sales of the stock among investors has no effect on the recored amounts in shareholder's equity

Issuing COMMON STOCK

When a company issues common stock, state incorporation laws often require that the storck have a stated par value Debit Cash Credit Common Stock at Par Credit Additional Paid in Capital

Assets are recorded at historical costs even though current market values might, arguably, by more relevant to financial statement readers. Describe the reasoning behind historical cost usage.

Historical costs are used by accountants because they are less subjective and, therefore, more reliable than using market values. Market values can be biased for two reasons: first, we may not be able to measure them accurately (consider our inability to accurately measure the market value of a production facility, for example), and second, managers may intervene in the reporting process to intentionally bias the results in order to achieve a particular objective (i.e. enhancing the stock price). The use of historical costs in accounting records does not negate the importance of market values. For example, a firm offering to pledge land as collateral for a loan will be expected to use the market value of that land rather than its historic cost. The same would be true if a corporation were considering the sale of the land. Finally, we shall see that certain assets are reported at market value in the balance sheet; securities that are available to be sold provide an example.

What are the two essential characteristics of an asset?

Asset: Economic resources that provide probablye future economic benefits obtained or controlled by a particular entity as a result of a past transaction or event. An asset must be "owned" and it must provide "future benefits." Owning means we have title to the asset (some leased assets are also recorded on the balance sheet as we will discuss in Chapter 10). Future benefits can mean the future inflows of cash. Or, it could relate to some other benefit, such as the reduction of expenditures, an increase in another asset, or the reduction of a liability.

Accounting forPurchase of Treasurey Share

If a company repurchases its own shares in the market, these are refered to as treasury stock transaction - It reduces SE by th Treaury Stock (-SE) Cash (-A)

FairValue

Invements in marketable securities

Contingent Liability

Contingent liabilities are potential sacrifices of future econmonic resources that depend on the outcome of some future event. (ie - lawwuite). These are put into financial statements if: a) The sacrifice of a future economic resource is probably b) The amount can be reasonably estimated. Journal entry: Debit Expense, Credit Liability

What does the term current denote when referring to assets?

Current means that the asset will be liquidated (converted to cash) within the next year (or the operating cycle if longer than 1 year).

Recognition and Measurement of Equity

Equity: Residual Interestin Assets of an entity that remains after deducting it liabilitys - Just a function of how and when Assets and liabilities recognized

What three conditions must be satisfied to require reporting of a liability on the balance sheet?

Liability: Probable future sacrifices of economic benefitsarsing from present obligations of an entity to transfer assets or provide servicesto other entities in thefuture as a result of past transactions or events. The three conditions necessary to recognize a liability are: 1. The liability reflects a probable future sacrifice on the part of the organization. 2. The amount of the obligation is known or can be reasonably estimated. 3. The transaction that caused the obligation has occurred.

What are different types of Liability and how are they classified and accounted for

Most but not all liabilities are financial obligations requiring future payments of cash - Current Financial Liabilities (AP,Notes Payable) are recorded at non-discounted value expected cash payment - Non-Current: financial liabilities (Long term debt,bonds payable, etc) are recorded at DISCOUNTED (PRESENT VALUE) of expected cash payments - Nonfinancial obligations such as unearned revenue, accured warranties are recorded (Current on non-current) as NON DISCOUNTED